Young, Optimist, Realist

Ironically, the picture I chose to use for this post was from a trip to Washington DC with friends right before we all started college and now after college this is where my checks get sent to. This will be a rudimentary outline of what I would have wanted to learn in college in a Personal Finance course. Good news is that of the 120 credit hours you have taken or will be taking, this will probably be one of the most applicable to your daily life. Whether you are in college or a recent college graduate this is for you and the thesis for this course is that a $50,000 salary career right out of school does not mean $50,000. I am going to discuss the importance of getting educated on personal finance for young adults. I first plan to lay out a basic finance scenario, followed by what I think are the most important aspects of personal finances for young adults and those are student loans and credit cards.

The Scenario:

Put yourself in the position of a college grad who is starting their first day at their new career and they are getting paid $50,000, I will call her Suzy Q. Most likely Suzy Q gets paid bi-monthly and that would be $2,083.33 paid on the 15th and 30th of every month. Seems like a good paycheck on the surface. Now I will break it down:

Suzy graduated with $40,000 in debt and the average interest rate is around 4% for all of her Stafford Loans. She was lucky and had family help pay the additional costs of college. Because she wanted to pay off the loans quickly, she did a 10-year payment plan. For ease of math, let’s just say Suzy is required to pay $500 a month for 10 years. If you are curious what she would actually pay or if you want to estimate your student loans if you are currently in school, check out this easy to use calculator from the New York Times.

Suzy has a checking account and a savings account. Suzy is starting fresh and has just $100 in her checking account and $1000 in her savings from her grandparents.

Suzy set up a 401k that takes out 5%

Suzy has a few insurance elections that account for $50 a paycheck

Suzy has a car with no debt on it because it was her father’s old car but she pays the $100 a month for auto insurance

Suzy is lucky enough right now to live at home free of charge but she pays $30 for parking at the train and $180 a month for a train ticket

For ease, lets now finally say Suzy has a tax rate of 25%

Based on the above scenario, Suzy’s checking account went from having $100 in it at the beginning of the month to now having $2,158. Sounds like a lot of money for a job right out of college, but before taxes or any expenses she earned $4,166 for the month. So pretty much 50% of her money is gone before she gets to spend/save any of it. A lot of people do not understand this until they get this job and they learn all of this as they go. Something that they will also learn is that the beauty of student loans is that when you first start paying back the loans, after your first year or so of payments you’ll realize your outstanding balance remained the same, if not increased a little bit. That is because depending on the way you elect to pay back your student loans, your monthly payment might just be used to pay off the interest accrued for the month. This is all why I think it is very important to teach college students this type of lesson and make it applicable to real life and make it personal for each student. This way they can truly start to understand the value of a dollar before they really even have to experience any of this. Learning this ahead of time can help a student understand prioritizing finances and saving money and even investing.

Student Loans:

Now that I outlined a basic scenario of how many college graduates are with finances after college, I want to stress the importance of personal finance education to college students. College students should 100% be taught the very basics of taking out student loans, the basics of personal taxes, the basics of insurance, etc. The way society is now with “millennials” is that you have all of these high school students thinking “the next step is to go to college, graduate, and get a job”. Seems simple, but the way the system of college is setup in the US is it allows for the vast majority of high school students to attend college and take out thousands of dollars in government/personal loans with ZERO issues. Credit score doesn’t matter, income doesn’t matter, the government is going to write the check on your behalf because they know for 100% certainty that you MUST pay back your loans and not even a bankruptcy can save you.

If you compare taking out student loans to taking out a car or home loan, you will find the process much more grueling and more based on your likelihood to pay back the loans based on many financial factors. Without getting into details and stating facts that college is outrageously expenses and the costs are out of control, I think that is a fact that pretty much every single person in the US can agree on. However, just because the cost of college is out of control and that means more debt to students, the government still does not care because they know you will have to pay the loans back and they also get more interest on higher amounts of money loaned to students.

This is why personal finance education is so important. I think that if students were educated on student loans and personal finances, many would think twice about where they went to school and how much school costs. Right now students choose a school based on a program, or a sport, or location without really any thoughts on how much it will cost them. Of course the school you go to breaks down the amount of the estimated costs like tuition, cost per credit hour, textbooks, housing etc. but at the end of the day the student sees those amounts and just thinks “I will worry about the loans later”. Look at it this way: A student wants to buy a car for $20,000. Right when you are applying for the loan you get estimated on an interest rate and an estimated down payment and an estimated monthly payment on the loan. The student looks at this more objectively and makes an educated decision based on the numbers specifically because at the time paying off the car takes effect immediately and they have to look at their income and savings to see if they will be able to maintain payments at this time to afford this car. Depending on your job and other factors, some people will be able to afford a down payment of a couple thousand and a monthly payment for 5+ years of $300 a month, but others will see that, look at their finances and know there is actually no way they can afford the car right now so they do not buy it, even though they want the car very badly those people who cannot afford that car will have to look elsewhere for means of transportation.

Buying a car, depending of the situation, can be a necessity and as some people see it, college is a necessity to this day in age, however there is a huge difference on how students look at both necessities. The car, they look at much more closely and if they can afford it, they buy it and if they cannot afford it then they look for a much cheaper option because at the end of the day, they do need the car. If you look now at how a student analyzes the cost of college, they do not care when they enroll in a college of the interest rates, timeframe to pay the loans back, and the monthly payments because at the time of enrollment they do not care of the costs because it’s not something that will go into effect as soon as they enroll day one. College students and even graduating high school students should be educated on the costs of college and how it can affect them when they graduate. I am not saying all students after being educated will make better decisions where they want to go to college because they were educated on the costs of college. I am saying that students must be given the opportunity to be educated on personal finance that most certainly must include the cost of college. That way, at least, for the students who do care about money, they are then more aware of their finances and the cost of college and might make a different decision on where they go to school.

Credit Cards:

Finally, after my tangent on student loans, I can finally discuss the importance of credit cards and how they can help a college student with their personal finances. Many people are afraid of credit cards, probably because they are unfamiliar with how they work or because they hear horror stories. For me credit cards were and are a very positive experience. Credit cards give people the opportunity to spend money they do not have, but if not done correctly can lead to a mound of debt. Using credit cards also gives people the opportunity to build their credit history so when they are older and are looking to buy a house, they have the solid credit history needed to get approved for a mortgage. Credit cards helped me get some nonsense things like a new Xbox or a new TV during college. But where they really came in handy was for booking trips and going out to restaurants/bars.

I applied for my first credit card around my sophomore year of college when I just turned 19. The card was a Capital One Journey card with a $350 and a very high APR of I think 24%. For those who do not know how credit cards work, in the worst case scenario I will pay $84 in interest for an entire year. Now that may sound like a high number while in college making minimum wage but I assure you it is not. Also, $350 of debt may sound like a lot at first, but I will assure you here that it is not. As a college student why isn’t 24% interest on $350 and being $350 in debt a bad thing? The answer is simple, if you have a job now during school that you take seriously and are working hard while at this job, you go into the whole idea of credit cards with an optimistic view. I assumed, ok worst case scenario, I max the card out and I pay $84 in interest a year ($7/month) plus the minimum payment. Assuming that, I then was a big optimist in thinking that I will rack up debt now but when I graduate I will be able to pay off this credit card debt no problem and guess what it worked. I estimate that I probably graduated college with about $2,000 in credit card debt between the 2-3 cards that I had with variable interest rates. And no, I did not max out a single card. I was very responsible when it came to making payments on time and not maxing out any card. Instead I utilized the credit cards and got $2,000 in debt but guess what types of things I spent that money on? I racked up that debt on my New Year’s Eve trip with friends to Fort Lauderdale in 2011, I took weekend trips to nearby cities like Milwaukee, and I went out a lot to bars as soon as I turned 21 my junior year. Looking back, I do not regret any of that. I consider those to be experiences that you cannot get back while you are young. As of right now, I paid off all of that debt from college now that I have a very stable full time job. Ok, I did just make the minimum payments every month to maximize my cash balance so yes I paid a little bit of interest on the credit cards.

There are some tricks I used to not let the idea of credit cards scare me. For starters, I completely ignored the horror stories I heard of people filing bankruptcy because of credit card debt. I then ignored the APR% I would be paying on each credit card. The credit limits on my cards in college were all under $1,000 so even a high interest rate was not a lot of money. If I had a card with a limit of $800 with a 25% APR and I had a $500 balance on the card, that means every month I would be charged $10.42 in interest. The key here is to always make payments on time, and when you can even do a little more than the minimum payment because then that would lower the amount of interest you have to pay. In college, I lived off just paying the minimum payments and rolling with the punches while knowing that eventually I will pay off the debt no problem.

As you can see if students were actually educated on personal finance when they were younger, many would make smarter decisions with their money. I acknowledged that there are true horror stories of people and credit cards, but they should not be feared. When you are younger, no one seems to talk about the benefits of getting a credit card, which are what I just outlined. Something I did not touch on with regards to benefits of credit cards are rewards. I will not get into the details here but pretty much when you do not have a credit card and just use a debit card for every purchase you make, what do you get out of it? Nothing. At least with a credit card, you get rewards ranging from cash back to points to use for travel. Although I extremely encourage credit cards in college, I will state a disclaimer that it is easy to get carried away with credit cards and get into bone crushing debt, but that is the whole point of educating young adults on credit cards.

To wrap up, I wrote on many reasons why the education of personal finance for young adults or college students is important and I hope you can agree that it is very important that young adults get educated on personal finance before someone starts college or at least when someone is in college rather than the current method of “learning as you go”.

Part I: The Mindset of a College Student

I talk with friends all of the time now about personal finances and there is a common idea that always comes up. We should have been taught about personal finance in college instead of things like “What defines piety?” or trying to figure out some long complicated problem regarding widgets from a textbook older than you are in an Ops Management course that will never apply to anything you do even if you go into Ops Management.

I bet that some of you have thought about that based on what you know now. There are so many things ranging from taxes to 401k’s to insurance to credit cards that we learn too late in life. Unfortunately when you move out and start your career with a salaried position at a decent company and start paying taxes you quickly realize the value of a dollar. That is not counting student loans, transportation costs, medical bills, insurance, savings, 401k’s etc. As soon as the paycheck hits your account most of that money is already spent or allocated.

Outside of parents telling you the value of a dollar or that you should save your money, you should be taught in the classroom. For starters, when your parents give you advice on money at a young age you somewhat blow it off because what do you care you are 18/19/20 years old and may or may not have a job that pays minimum wage or a little above that. As you know the only reason you are bagging groceries at Costco is for drinking money for the weekends. Second, I am not suggesting some dry boring class that students would get buried in long complicated texts and readings and tests. The idea for the class would be interactive, it would make it personal for the students. Just think how much students would learn in college if you made it personal and apply it to their daily lives. I am about to share more valuable information with you than any information you will get or have gotten from any gen. ed you can take in college.

Don’t Take College Too Seriously

Remember DTCTS! You are probably wondering why the hell I made an acronym out of the title, it is actually just made up. The building I live in puts up signs randomly in the elevator for like Christmas rules like tree disposal, noise, etc. and they will highlight the first letter of each bullet point to make it look like it is some special acronym they want people to remember but it never makes any sense.

I do not mean this heading in a literal sense, I am referring to students being more focused on their career than their actual schooling. I am also not suggesting to blow off classes and work 40+ hours a week just for the bread. Many students use the excuse of “I take umpteen credit hours and I just don’t have time for a job”. When you hear that you should know that this person is just lazy and doesn’t care about their career at this point because as soon as you sit your ass down in your first class freshman year, that is when you should care about your career. Caring about your career does include getting good grades but lets be honest, high school is more time consuming than college in the sense that in high school you would attend classes M-F from 8am-3pm and it SUCKED! College is much easier even if you take 18 credit hours because you will have days where you have no classes or just two classes. I can name 3 people right now who would disagree on these last few statements but that is why anomaly is a word.

Bottom line is that college gives students way too much free time for them not to have jobs. I am one to say that I doubled majored in finance and accounting, took 18 credits hours a semester to do so, and work in the city (40 minute commute via train daily) 30 hours a week and I am not the smartest student. I did what needed to get done in order to get 3.4 GPA. Most importantly, I showed up to class, most classes this is 10% of your grade right there. Another portion of your final grade might be 20-40% on homework, so even if I half assed it or guessed, I still turned the homework in on time because for most professors homework is just a completion grade because they do not want to sit and grade nonsense homework twice a week for just one class of 30 students not counting the other 4 classes they teach. I put forth the effort on showing up and doing the homework to where there was not such a big weight on getting an A on tests. Sure I studied, mostly the night before for a few hours, then I would get to the point to where I would say to myself “At this point either I know it, or I don’t” and then close the notebook and turn on the Xbox. I would piss some fellow classmates off because they know I half assed my way through classes (not buying a textbook for a course gives off that impression I guess…) that they would wonder how I do it. They see other people clearly half assing it and not trying really but they are obviously failing the class and the way I always pulled off good grades amazed them.

At the end of the day, as long as you finish college with a 3.2 to a 3.5 you’ll be fine when you look for that full-time job when you graduate. When it comes down to it, your experience gets you the interview not your GPA or schooling. Employers just want to see that on there because if you have a bad GPA or did not go to school it is a quick way for them to eliminate you. The reason I say do not take college too seriously is because rather than be focused 100% on your grades, you should actually take 50% of that focus and aim it towards a job/internship. I am not referring to a “would you like fries with that job”, I am referring to a job or internship that would look great on a resume. Many students get too caught up in the qualifications of a job or that they do not know if that is something they want to do for a career. There is a secret, outside of a few specific professions (i.e. doctor) no one really knows what they want to do for the rest of their lives and if someone tells you otherwise they are a liar. Ask most adults who are in their late 40’s that if they look back to when they were in college did they imagine themselves doing what they are doing now and I bet the answer is no.

Students should just be going for jobs that pay decently and provide a great experience. For example, if you want nothing to do with insurance do NOT rule out doing an internship at Allstate or State Farm. A basic job at an insurance company provides great experiences like learning how to be a part of a team outside of sports and learning basic office skills like faxing, copying, Outlook, etc. You might laugh but every so often at work I will get that nut with an aol email address who asks for our fax number. Getting that full time job is much easier if you have that solid job you are able to speak about as if its your current career. Of all of the interviews I went on for internships while in college, I spent 95% of the entire interview talking about my current job and my past jobs and that is why I truly believe that college students should take internships and jobs during school more seriously. This leads me directly into my next topic I think perfectly…

“Excuses are like assholes. Everyone has them and they all stink!”

No one is hiring right now, There are no jobs out there that I want, I do not have time for a job with all of my classes, There is no way I will be able to commute to this job in between classes, I am not qualified for this – Those are just some of the excuses I have heard from college students on why they do not have a good job for their career advancement. Apologies by the way for the semi-graphic quote from Always Sunny in Philadelphia. Too many people now a days come up with so many crazy excuses on why something cannot be done and they just play the victim. What people slowly learn as you hit your mid-twenties is that this world owes you NOTHING. If you want something you go out there and get it.

College students can read all of the blogs like mine in the world but if there is no passion to will to do something then it is always easy to come up with an excuse for why. I will bore you with a short story that illustrates how much hard work actually pays off. When I was working as a branch intern at Scottrade in the south suburbs of Chicago during my sophomore year into my junior year at a small private school on the southside of Chicago, I applied to be an Operations Intern at an investment bank downtown Chicago. The managers I interviewed with loved me but there was one big issue and is was that they were seriously worried about my ability to go to school with 18 credits hours and somehow make it to work as an intern here for 20 hours a week and to be honest, at the time I was worried too. With no idea how I actually planned to pull that off, I assured everyone that there would be zero issues with me going to school in the southside and being able to work downtown. Turns out there were somedays due to timing where I went from class from 8-11, then drove 25 minutes to the Orange line off of 55th and Pulaski, then take a 40 minute CTA train ride into the loop, work from 12:30-5, then take the CTA back, drive the 25 minutes back to school for a 3.5 hour night class, and then finally drive home to Tinley Park and get into bed around 11. The days were outrageously long and sometimes when I would show up to night class I would sit down at the desk and stare off into space and think “I seriously do not remember driving here…”

I share that with you to show that if you truly want something you will do what it takes to achieve it. This story also goes back to the importance of getting a job, even if it is not something you are sure of actually doing. My first day was me sitting down at my desk at William Blair and staring at a stack of hundreds of envelopes of returned mail that needed sorting (you can see just a portion of it in the image on this post above). It was a pain in the ass but I did the job and no it was not something I wanted to do forever, but guess what, the most important thing to me was that I was getting experience at something transferrable and this looks great on my resume. I think many students get too caught up on the fact of being very selfish and always are looking for that perfect job, but in fact they should be thinking if it looks good on a resume and if it gives them good experience.

I finish with a confession that this first part might have been too detailed or too wordy for my liking but I think it is definitely necessary to put perspective the mindset of a college student who succeeded based on the above thoughts. My next thoughts in Part II will focus on my favorite part and that is the finances. I will touch on things like student loans, credit cards, investing, and more that should have been taught in college to help setup each student to make them a financially conscious person. Instead we have students graduating college, getting a letter from Great Lakes stating that they owe thousands of dollars to the US Government and they are left saying “What the hell just happened?”